The market has recovered sharply, now can it be sustained this year?
The past year saw the Irish commercial market firmly in the midst of a remarkable recovery, outperforming both Irish bonds and equities to become one of the hottest markets globally.
Overall, 2014 saw Irish property returns hit a record high, providing investors with a total return of 40.1pc, as measured by the IPD/MediKids Index.
Against this backdrop and that of an established economic recovery, 2015 is shaping up to be another strong year. 2014 was a record-breaking year for the Irish investment market. Stellar performance during the year saw turnover reach €4.5bn in 2014, making it not only the highest annual volume on record but outstripping the previous high of €3bn achieved in 2006.
Turnover for the year was also considerably higher than the 10-year annual average of €1.5bn. Furthermore, as well as direct sales, there was approximately €9bn worth of residential transactions and a further €17bn worth of loan sales in 2014; this brings total volume of investment to north of €30bn in 2014, a phenomenal level of investment by historical standards.
2014 investment volumes were boosted by a significant increase in the number of portfolio sales which transacted during the twelve month period. In particular, nine out of the top ten deals in 2014 comprised portfolio sales, thus reflecting strong appetite among investors for larger scale investments.
The largest deal of the year was the acquisition of a portfolio of office and retail assets known as Project Sapphire by Green REIT Plc for €375m in quarter two. 2015 is likely to see portfolio sales remain a key feature of the market, coming through Nama. While there will be a number of big ticket investments, the market will probably see more smaller portfolios of approx. €30-60m in value.
Similar to previous years, Dublin remained the key target for investors, accounting for the largest share, €3.6bn or 80pc, of investment activity in 2014. That said, 2014 saw investors shift their focus from core areas in Dublin city such as the Central Business District to secondary and suburban markets across Dublin. However as NAMA accelerates its disposal of secondary and suburban assets, investors will be increasingly drawn outside the CBD in 2015.
A key trend in 2014 was a resurgence in investment outside of the Capital, lured by attractive pricing relative to prime Dublin. Activity outside of Dublin to date has been dominated by private Irish investors, while overseas investors have largely concentrated their investment activity in Dublin to date. 2015 is likely to see this trend continue for the most part, however some investors may look at core assets in the key regional centres of Cork, Galway and Limerick.
In terms of the source of capital, 2014 saw overseas capital remain a fundamental element of the market. In excess of €1.6bn worth of investment flowed into the Irish market from overseas with US investors continuing to lead overseas capital, accounting for 86pc of the foreign spend in 2014. This year will see private equity investors, particularly from the US, play a key role in the Irish market, continuing the trend of the past few years.
Notably, there has been a shift in focus from opportunistic investors attracted by the legacy of the financial crisis to new entrants willing to take on risk in search of higher returns. 2015 is expected to see increased inward investment from the UK as Irish property becomes increasingly attractive to UK buyers, buoyed by the strength of the Sterling in recent months. That said, the volume of domestic investment almost doubled during 2014 with volumes anticipated to increase this year, purely because the nature of the sales will be smaller portfolios and smaller lot sizes, appealing more to the domestic buyer. Furthermore, domestic buyers are likely to feature most predominantly when private equity investors begin to deleverage assets purchased earlier in the cycle.
While private equity investors remained the dominant players in the market in 2014, accounting for 34pc of overall turnover, investment by Irish Reit's soared during the twelve month period. Combined spend by the three Irish Reit's, namely the Green Reit, Hibernia Reit and IRES, amounted to 23pc of overall activity.
This compares to 13pc during the comparable period in 2013. The REIT's were successful in securing a number of significant portfolios during the year, including Project Sapphire and Project Orange in addition to a share of both the Central Park Portfolio and Project Redwood, four out of the top five overall transactions of 2014. Reit will remain a feature of the market in 2015; however, having deployed over €1 billion in capital in 2014, the volume of spend will not be as significant this year. 2015 is also likely to see the establishment of more QIF's and QIAIF's investing in the market.
2014 saw offices remain the most sought after asset class, driven by a buoyant office market, characterised by a low vacancy of Grade A accommodation and rapidly rising rents. However, the latter part of 2014 saw the retail investment overtake office investment as the preferred asset. Activity in 2014 was boosted by a number of large transactions including the sale by Aviva Investors of a majority stake in the Liffey Valley shopping centre in Dublin in an off market sale for a sum in excess of €250m, the largest single asset transaction of the year. 2014 also saw the first Nama shopping centre portfolio, "Acorn Portfolio", which was acquired by Varde Partners for a reported €171.4m reflecting a net initial yield of 7.4pc. 2015 will see the volume of retail investment increase considerably with a number of shopping centre and retail park portfolios expected to be launched, including the much awaited Project Jewel, which contains the prize asset, Dundrum Town Centre. Furthermore, the recently announced quantitative easing programme is expected to enhance the sector further.
2014 saw prime yields compress across all sectors; the continued weight of capital coupled with record low interest rates is expected to maintain downward pressure on yields during 2015.
Prime headline office yields in Dublin CBD are expected to contract to 4.75pc during 2015, just 75bps above peak market levels, while secondary yields are expected to compress in line with rental growth. The prime retail sector is expected to witness the strongest level of compression; that said, yields still remain well above their pre-crisis levels.
Last year was an outstanding year for the Irish commercial property market, with both the volume of investment and returns reaching record highs. While it will be a difficult act to follow, current indicators would suggest that 2015 is expected to be another year of strong performance. Although Dublin remains firm and the office sector the primary engine driving single asset investment, this year will see the retail sector strengthen further and a more broadening out of activity to the key regional cities.
The year is also expected to see increased activity in the multi-family, student accommodation and retirement sectors. We expect robust performance in 2015 from a wide range of investors both overseas and domestic. Up to €30bn could potentially transact this year, however, how much of this will be loan sales and direct sales remains to be seen.
Aidan Gavin is managing director of DTZ Sherry FitzGerald.